Frenemies at the gates − speech by Rebecca Jackson

Core Insights - The global equities market has continued to reach record highs, with the S&P 500 increasing by 16% over the past year, primarily driven by mega-cap technology stocks, raising concerns about potential bubbles in AI-related stock valuations [2][3] - The emergence of Principal Trading Firms has transformed the market landscape, as they have become significant liquidity providers, competing directly with banks in various market segments [5][8] - The risks associated with proprietary trading have shifted from regulated banks to non-bank entities, creating new counterparty risks for banks that provide leverage and clearing services to these firms [6][9] Technological Advances - Rapid advancements in technology, including quantum computing and Generative AI, have significantly improved transaction execution speeds, with latency now measured in microseconds and nanoseconds [4][17] - High-frequency trading has evolved with the use of microwave technology, allowing for faster order transmission compared to traditional fiber optic cables [4] Market Dynamics - The regulatory environment post-Global Financial Crisis has led banks to shift from proprietary trading to client-oriented business models, allowing non-bank financial institutions to fill the void [5][6] - Principal Trading Firms have gained prominence, generating trading revenues comparable to major global investment banks, and have become valuable clients for banks despite being competitors [8][9] Risk Management - The reliance on post-trade monitoring and controls poses challenges for banks, especially given the rapid execution speeds of trades, which can lead to significant risks if issues arise [17][20] - Banks must enhance their risk management systems to keep pace with the evolving landscape of Principal Trading Firms and their trading strategies [27][31] Client Due Diligence - There is a need for banks to improve their client onboarding and risk disclosure practices for Principal Trading Firms, as these clients often do not fit traditional risk categorization frameworks [29][30] - Adequate disclosures from Principal Trading Firms are essential for banks to manage their exposures effectively, particularly regarding intraday risks [31][32] Regulatory Focus - The Prudential Regulation Authority (PRA) plans to conduct further assessments of banks' counterparty risk management frameworks, specifically targeting their control of intraday risks [33]